In addition, the effects of changes in the various working capital line items on the balance sheet must also be taken into account. The method chosen depends on which information is more readily available. Depreciation and amortization are subtracted because they are non-cash expenses. Conversely, it can also be calculated by subtracting all operating expenses (less depreciation and amortization) from revenues. To calculate operating cash flow under the indirect method, subtract all depreciation, amortization, income taxes, and finance-related income and expenses from the reported net income of a business. The derivation of the two methods is noted below. There are two ways to calculate operating cash flow, which are the indirect and direct methods. If not, it will either be necessary to obtain additional funding to maintain a sufficiently new set of fixed assets, or management can elect to replace assets at longer intervals, which can lead to higher repair costs and more production downtime. In particular, compare the amount of this cash flow to a company's ongoing fixed asset purchasing requirements, to see if it is generating enough cash flow to fund its capital base. Operating cash flow is closely watched by analysts, since it can provide insights into the financial condition of a business. It is presented within the first section of the statement of cash flows, which is part of the financial statements. Operating cash flow can be a more reliable indicator of financial health than the reported net income of a business, since net income can be altered by non-cash revenue and expense transactions.
This information is used to determine the viability of the core operations of a business, since positive cash flow is needed to maintain and grow a firm’s operations over time. It does not include any investing or financing activities. Operating cash flow is the net amount of cash that an organization generates from its operating activities.